Climate-related impacts are biting – but who will pay the bill?

Comment: The latest report from UNEP says that global costs of adaptation could range from US $140-300 billion by 2030. It’s time to get innovative on sources of finance

Kalisi holds her son Tuvosa, 3, in the remnants of her house in Rakiraki District in Ra province in Fiji (Pic: UNICEF)


Few phrases engender greater alarm among negotiators.

The concept of “loss and damage” at the UN climate change negotiations has emerged and grown more prominent as countries fail to adequately reduce their emissions, rendering even heroic adaptation efforts inadequate to confront climate impacts.

The devotion of a full article in the Paris Agreement to loss and damage was a major breakthrough for the world’s most vulnerable nations. Article 8 says that countries should enhance understanding, action, and support with respect to loss and damage.

Some of the controversy relating to this seemingly vacuous language is due to its remaining poorly defined.

It is actually quite simple: countries are not reducing their emissions enough to stem global warming and nations damaged by climate impacts must be helped. A key issue that remains unclear is how adequate, predictable funding can be raised to do so.

This week a workshop at the German Development Institute (DIE), co-organized by Bangladesh’s International Center for Climate Change and Development and Brown University’s Climate and Development Lab, reviewed a white paper that discusses five approaches that will prove central to defining and developing support for loss and damage response.

Approach #1: Fund insurance, but don’t stop there

U.S. President Obama’s Paris announcement of a USD 30 million contribution to climate risk insurance initiatives in Africa, the Caribbean, and the Pacific was a start, but this approach of making ad hoc donations to insurance schemes may not be politically sustainable.

For developed countries, such a focus on one-time contributions subsidizing insurance deflects their own liability for losses and damages and pulls the private sector into financing efforts.

Wealthy countries can and must do much more to support insurance schemes. Their contributions must be stable and increase steadily as climate change intensifies.

An estimated 45,000 school-aged children have no access to education as a result of Cyclone Pan (Pic: UNICEF)

An estimated 45,000 school-aged children have no access to education as a result of Cyclone Pan (Pic: UNICEF)

However, a focus on insurance alone is far from optimal for vulnerable nations. Insurance is best suited for low-frequency, high-intensity events like hurricanes, and cannot be effectively used to address climate impacts that make substantial financial loss virtually certain, like recurrent flooding, extended droughts, or desertification.

Second, by definition, the many non-economic losses and damages like loss of life, culture, and livelihoods are not compensated by insurance payouts.

Insurance schemes chronically fail to reach the poorest and most vulnerable, as anyone without substantial property to insure will not receive payouts.

Vulnerable peoples can’t afford premiums and paying for them alone would mean a major transfer of their limited wealth to private insurance companies, who get to earn interest until disaster strikes. In sum, insurance is a start, but an incomplete one.

#2: Ensure that funding is adequate (depending on mitigation efforts) and predictable

There exists an extremely broad range of estimates of the funding that will be required to respond to loss and damage, from over $400 billion a year by 2030 to an average of $600 billion a year over the next two centuries if we fail to act fast enough to reduce our emissions.

Clearly, improved data is needed, but so is urgent action to reduce those emissions, and to make societies resilient in the face of change.

The flow of finance for L&D response must also be predictable, since this will encourage vulnerable nations’ governments to undertake improved planning on how to use funds in the event of disaster.

This will then allow them to allocate funds more efficiently and effectively should disaster strike.

#3: Ensure that we do not “rob Peter to pay Paul”

The latest report from UNEP says that global costs of adaptation could range from USD 140-300 billion by 2030. Estimates of current international flows to developing countries range from USD 24 billion to just USD 6-10.

Clearly, it is crucial that finance for efforts to address L&D in coming years be new and additional, not diverted from adaptation efforts.

So it’s time to get innovative. Many compelling financial mechanisms have been suggested to provide such funding.

These include a financial transaction tax (a tiny Tobin tax), levies on air travel (such as the International Air Passenger Adaptation Levy, with funds going at least in part to L&D instead of only to adaptation), a levy on bunker fuels, a tax on fossil fuel extraction (Carbon Levy), and a global carbon pricing scheme.

Although the feasibility of such instruments has been called into question, some such tools have already been used successfully on national and subnational levels.

Other instruments propose levies either on industries hitherto untaxed (i.e. maritime shipping) or modest fees that would make no difference to industries’ competitiveness or profits (i.e. a passenger levy of $5-10 on international flights would make essentially no difference in travel decisions).

There are some encouraging noises on this: the fact that the Standing Committee on Finance of the UNFCCC will devote its 2016 Forum to instruments to finance loss and damage shows that a mix of Annex I and non-Annex I countries have already agreed that exploration of innovative sources is necessary.

#4: Consider fairness of funding

Tools used to fund loss and damage response should acknowledge that the nations suffering the worst impacts of climate change are also those with the least responsibility for causing it.

After much wrangling, the Paris “decision” text established that wealthy countries will not compensate developing nations for climate-related losses and damages. In other words, poor and vulnerable countries must themselves pay the primary costs of climate impacts, as developed nations have refused to accept liability for the unbounded and potentially massive future scope of L&D.

The secondary burden of paying for instruments that do already have defined prices cannot fairly also be forced onto vulnerable nations. Far more equitable funding of financial tools such as insurance premiums, catastrophe bonds, and contingency finance is needed.

#5: Start now

Climate-related losses and damages are no longer a prospect of the distant future, but a present reality. Funding only mitigation and adaptation efforts is no longer enough, and the time to take the ‘political infeasibility’ of tools to fund L&D response at face value has passed.

Innovative financial mechanisms for loss and damage must be implemented and explored in pilot and by scaling up current efforts, not only studied.

Such a shift from theory to practice can be accomplished by building national capacity for addressing loss and damage in vulnerable countries, while simultaneously raising funds via new and innovative means to support these programs.

Such initiatives must be built on top of other actions already being undertaken, such as insurance schemes. Nations and implementers must actively share the knowledge they gain on overcoming challenges and best practices for doing so.

The Marrakesh negotiations in November are where key loss and damage elements need to be mapped out. There is a huge opportunity to lay a course to funding action this year.

The authors are researchers in Brown University’s Climate and Development Lab. The opinions expressed in this piece are the sole responsibility of the authors.

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